Answer to Question #184514 in Microeconomics for Fardin Jim

Question

Wages of bus drivers increase. At the same time, the incomes of consumers generally increase. In the market for bus rides, how do demand and supply curves shift? Assuming that the magnitude of shifts in the demand and supply curves is the same, what happens to the equilibrium price charged and equilibrium quantity demanded and supplied? Draw the diagram and explain.

Answer 1

An increase in wages for bus drivers will increase the cost of production. The supply curve will shift upwards and to the left as a result of a decrease in supply. Income rise to the consumers will reduce the demand for bus rides. People with higher incomes will choose to buy a car than to take the bus rides. Bus rides are inferior goods in this case. At any given price, the quantity demanded decreases. The demand curve will, therefore, shift to the left whereas the price and the quantity are expected to drop.

The equilibrium price is reached when the supply and demand curves intersect. Since the curve shifts upwards, the equilibrium price will increase but the quantity demanded and supplied will both fall. The shapes of these curves are affected by combinations of actions between businesses and consumers.

Below is a drawing that shows the effects on both supply and demand curves.